Businesses in the software, publishing, media and internet
industries may prefer to assign, rather than licence, copyright and
intellectual property for commercial reasons. However, the
Australian Taxation Office (ATO) has recently stated in Taxation
Ruling TR 2008/7 that an Australian Company (AusCo) that pays for
an assignment of copyright from a Foreign Company (ForeignCo) may
be liable to royalty withholding tax even though the assignment
appears to be an outright sale and not a licence or royalty
For Australian tax purposes, an AusCo that makes a payment to a
ForeignCo that is a "royalty" is liable to withhold
royalty withholding tax from that payment and remit the tax
withheld to the ATO. If the payment is not a royalty, no
withholding tax is payable.
Therefore, it is critical for Australian business to consider
whether they have an obligation to withhold royalty withholding tax
from any payment it makes to a ForeignCo for the assignment of, or
right to use, copyright and other intellectual property rights.
AusCo may be required under the terms of an assignment or licence
agreement with ForeignCo to gross up its payment to ForeignCo to
compensate for any royalty withholding tax withheld. The gross up
may itself be liable to royalty withholding tax and the gross up
will be an additional cost to AusCo.
What is a royalty payment?
A payment or credit for the use of, or the right to use, any
copyright, patent, design or model, plan, secret formula or
process, trademark or other like property or right is a royalty. An
outright sale or transfer of ownership of copyright, and other
intellectual property, would not be a royalty.
Taxation of royalty payments
In TR 2008/7, the Commissioner of Taxation states that the terms
of an agreement to assign copyright will need to be carefully
considered to determine if the assignment amounts to an outright
sale or a grant of a licence to use that copyright. The factors to
the estimated legal life of the copyright
the geographical extent of the assignment
whether all of the rights associated with the copyright are to
any limitation on the assignment as to the class of acts that
the copyright assignee has the exclusive right to do, and
whether the amount and timing of the payments are dependent on
the exploitation of copyright by the assignee.
What should you do?
It is important to understand the Australian tax implications of
an assignment, transfer or licence of intellectual property
involving offshore entities. In particular, AusCo will need to
review the contractual terms of any licence and assignment of
intellectual property it has with a ForeignCo to determine if AusCo
has an obligation to withhold royalty withholding tax, and more
importantly, whether the payment to ForeignCo is to be grossed up
for tax that is withheld in Australia. Any gross up of tax will be
an additional cost to AusCo. The Deacons tax group can provide
advice on whether a payment for the assignment, or use, of
intellectual property is a royalty payment and draft appropriate
withholding tax clauses for inclusion in agreements.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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